Nicholas Kaldor and Mainstream Economics: Confrontation or Convergence.

The collected essay format for examining broad themes relating to the life work of leading economists has become increasingly popular in recent years. The success of such an undertaking depends on the effectiveness with which editors conceive their projects, and communicate their visions to the contributing authors. Their other specific task is to establish relevant linkages via their arrangement of the volumes' parts and chapters and in their editorial introduction. Edward J. Nell is a particularly skillful editor, who, together with his colleague Willi Semmler, has produced a collection of essays, some jointly authored by 34 economists, most of whom are critics of mainstream economics intellectually devoted to the daunting task of trying to articulate alternatives to it. In their totality they are very effective in the further development of Kaldorian themes using post-Keynesian or classical-Marxian approaches. The notable exceptions are Edmund Phelps, Paul A. Samuelson and James Tobin, who, despite their links to neoclassicism, offer enlightened insights into Kaldor's work.

The "Editors' Introduction" is especially well conceived; it performs the dual task of focusing on Kaldor's alternative theories, while literally taking the reader by the hand not only through the maze of criticisms which non-neoclassical thinkers have directed at the mainstream, but also in directing them toward alternative intellectual paths. The editors set out to rebut the oft-heard criticisms that non-neoclassical theories are either wrong, directed at unnecessary or irrelevant questions or "not economics." They thus set the stage for identifying criteria for qualifying analyses as economics. Specifically, Nell and Semmler maintain that neoclassical analysis is a particular way of satisfying a general format [p. 3] which 1) specifies a setting or structure within which (market) behavior takes place; 2) identifies initial conditions as the starting point of the analysis; 3) articulates a model(s) of behavior; 4) establishes the conditions required for solution; and 5) specifics the dynamic paths of the model(s). Thus the possibility of altogether different specifications is the basis for competing explanations to economic questions.

For example, unlike the neoclassical approach, the setting of Kaldorian/post-Keynesian approaches distinguishes between wage and profit receivers as classes of persons; firms are typically conceived to be oligopolistic businesses that produce with given technologies. The operative behavioral assumption is that household and business spending is a matter of tradition, custom and institutional routine instead of being dictated by a maximizing objective. The objective of the analysis is to determine the equilibrium in spending that is consistent with the prevailing wage and profit shares. The resulting equilibrium, which is normally a demand equilibrium, is totally free of the market clearing requirement of traditional models.

Classical and Classical-Marxian approaches also take social classes and technology as their setting and identify the labor force (or its growth) and the stock of capital as initial conditions for specifying the economy's "reproduction" requirement. These approaches also assume that households follow customary spending rules and that there are institutionally specific forms of maximizing behavior. The analytical objective is two fold: to determine what static equilibrium prices and profit and wage rates are possible; it is also to determine what growth rates, relative industry sizes and consumption levels are consistent with the model's "reproduction" conditions. As in the Kaldor/post-Keynesian analyses, supply constraints are not part of the initial conditions and market clearing is not an equilibrium characteristic. Initial factor endowments do play a role in some versions and a form of maximizing behavior may be invoked to generate either a comparative static or steady state dynamic result. Both Kaldorian and Classical/Marxist approaches are capable of generating cyclical outcomes or bounded fluctuations. Though these approaches clearly differ from neoclassicism, both are consistent with the general format the editors specify as requisites for economic analyses. Kaldor's method was thus to develop the theory needed to address particular issues using the "stylized facts" of each case and such rules of the game as are needed to generate an analysis that is representative of the system operating as a dynamically interconnected whole. The analysis does yield "general principles," but these relate to a specific kind of economic system, such as industrial capitalism. The great weakness of the neoclassicists, the editors opine, is that they generally find it necessary to make assumptions that lead to minimally useful or, even worse, false conclusions.

The anthology's introductory essay "Nicholas Kaldor 1908-86," by A. P. Thirlwall, which comprises substantially the whole of Part I, offers an especially appropriate prelude to the selections that follow. The principal concern of these essays is to commemorate and extend Kaldor's rethinking of growth and distribution theory along non-neoclassical lines, which helped to spark the neoclassical-neoKeynesian capital controversies between Cambridge (England) and Cambridge (Massachusetts). Because this is an area of economic theorizing which is not widely studied by American economists, a brief account of the centerpiece of Kaldor's theory of distribution is a useful preliminary to the essays that follow Thirlwall's opening chapter. Kaldor's theory of profit is critical; its essence is that the profit share is the result of entrepreneurial expenditure decisions. Given that the propensity to save out of profits is greater than that of workers' to save out of wages and that investment is autonomously decided by capitalists, there will result a level of income at which savings is equal to investment and which is consistent with a unique distribution of income between wages and profits.

Kaldor's model of distribution also offers an alternative to the neoclassical theory of the equilibration of the warranted and natural growth rates. His argument was straightforward and simple: a warranted rate of growth above the natural rate with planned savings in excess of planned investment serves to reduce the profit share and thus the savings ratio. This Keynesian conception of the income level as the equilibrating mechanism between savings and investment seemed infinitely more realistic to Kaldor than the neoclassical view in which interest rate changes equilibrate savings and investment. The latter makes it necessary to envision the existing stock of capital being either "squeezed" or "spread" to accommodate the employment of the available labor.

Given this building block Kaldor undertook to articulate a model of growth to explain the "stylized facts" of capitalist economic history. These facts are a steady rate of growth of labor productivity, a steady increase in the capital-labor ratio, relative constancy of the capital-output ratio, a steady rate of profit on capital, and a roughly constant share of wages and profits in national income. What Kaldor wanted to show is that these "constancies" result from endogenous forces in capitalist economies which cannot be properly explained in terms of such unsupported assumptions as constant returns to scale, neutral disembodied technical progress, and unitary elasticity of substitution between capital and labor, which are all dear to the hearts of neoclassical theorists.

Kaldor's search for empirical regularities led him to his well known sectoral approach; it is necessary to distinguish between the increasing return activities of manufacturing and the decreasing return activities of the agricultural and service sectors. He thus advanced three growth laws; the first is that manufacturing is the engine of growth, the second, also known as Verdoon's law, is that manufacturing growth induces productivity growth through static and dynamic returns to scale. The third law is that growth in manufacturing induces productivity growth outside of manufacturing by absorbing unemployed or low productivity resources from other sectors in the early stages of development. The agricultural sector generates manufacturing growth. In later stages the stimulus comes from exports. At this juncture Kaldor incorporates Harrod's trade multiplier, using it as a basis for his hypothesis about a balance of payments constrained growth rate, i.e., it is the ratio of a country's growth of exports in relation to the income elasticity of its demand for imports that determines its growth rate.

Each of the 28 essays that follow elaborates on the preceding Kaldorian themes. The five chapters of Part II focus on methodology and includes papers by M. Desai, P. A. Samuelson, D. J. Harris, U. Krause and T. Scitovsky. To this reviewer Scitovsky's relatively brief paper, "The Impact of Division of Labor on Market Relations," offers some especially insightful thoughts about the implications of ignorance. Starting from the simple point that division of labor and specialization lead to fragmentation of knowledge about markets, Scitovsky credits Kaldor with rejecting the perfect knowledge assumption as a basis for exploring the implications of specialization and division of labor and proceeds to examine the logical implications of knowledge fragmentation on the relative positions of buyers and sellers.

Part III, "Savings and Distribution," includes only three chapters; yet they are central to explicating Kaldor's (and post Keynesian) distribution theory. The paper by S. A. Marglin and A. Bhaduri provides a counter-argument to the conventional one that the combination of wage growth and declining productivity generated a "profit squeeze" that was responsible for compromising the economy's growth rate during the 1970s. Their post Keynesian reformulation has it that both profits and wages have a dual role under capitalism. Today's profits are the primary source of savings for financing business capital. What attracts the investor is the lure of high profits tomorrow. Capital accumulation is contingent on high profits; thus a squeeze on the profit rate may be expected to compromise the growth of capital stock. Wages also have a dual character; they are costs to the capitalist but also the source of consumer demand. High wages an bad for the capitalist as a producer, but good for him as a seller, especially when demand from other sources is weak. Marglin and Bhaduri thus propose the recasting of macro models to build on the Keynesian insight about profit as the engine of capitalist accumulation. The present economic malaise is interpreted as not simply a problem of restoring high profit margins for this alone is unlikely to restore investment demand to a level required for a golden age. There are circumstances under which healthy capitalism follows from wage led rather than profit led growth policies. Over the longer run profit led growth may once again be appropriate but the transition, in the view of Marglin and Bhaduri, will require active demand which is contingent on reforming the international financial system.

This insight leads the leader comfortably into Part IV "Money and Macroeconomics- which is comprised of five papers by authors whose criticisms of monetarism are as well known as their contributions to the development of a post Keynesian alternative. Hyman Minsky's paper "The Endogencity of a Money" clarifies a seeming ambiguity in Kaldor's Scourge of Monetarism (Second Ed., 1985) about the exogeneity of money m order to reenforce his own well known view that "both theoretical and practical monetarism, as advocated and practiced in the United States and Britain in the early 1980s exacted a high price" [p. 207]. Kaldor is credited with being fully cognizant of the complex interdependencies that characterize economic systems and that there is a critical need to understand the conditions which make money exogenous rather than endogenous so that policy makers become better able to recognize the likely consequence of their intervention. Kaldor appreciated that new forms of financial intermediaries or transactions might well cause monetary authorities to "lose their grip" whenever they try to tighten control. Thus Minsky's argument is that the securitization of assets during the 1980s and the practice of allowing financial institution to originate paper as distinct from holding it in their portfolios rendered central banks characterized by this sort of sophisticated financial system fundamentally impotent.

Together with Minsky's paper, those of Paul Davidson and Basil Moore recapitulate and elaborate in terms of Kaldor's writings the post Keynesian position about the endogeneity/exogeneity issue with respect to money. Moore's argument views Kaldor's contribution in the historical context of Marx, Keynes and Kalecki, all of whom viewed the rate of interest as a monetary rather than a real phenomenon through it was only Kaldor who developed views about money's endogeneity and interest rate exogeneity on the basis of empirical evidence, very likely because he actually experienced a modern monetary production economy.

Along with Moore, Davidson reiterates his criticism of the monetarist general equilibrium view that money does not affect real outcomes. His criticism extends to Hahn's "money is neutral" axiom, i.e., money has no real effects. After restating his well known argument about the role of money contracts, Davidson also addresses the exogenous vs. endogenous money issue relating its origins to the Currency School-banking School controversies of the 19th century. This historical context poses the issue with particular clarity. That is, if money is exogenous as per the Monetarist view then, to the extent that changes in the quantity of money are associated with changes in the price level, money is, by definition, playing a causal role. On the other hand if money is endggenous (i.e., an effect) it follows that antiinflation policy intended to restrict the growth of the money supply can be effective only if it redirects aggregate demand and employment. Thus Davidson makes the critical point that the theoretical issue of whether money supplies are exogenous or endogenous has important implications for the cause vs. effects role of monetary policy in a modern production oriented economy. He chides the participants in the debate for being confused between a) the interest elasticity of the money supply function and b) the independence of the money supply function. Monetarists are guilty of assuming that the money supply function is perfectly inelastic (i.e., independent of the factors affecting the demand for money function) which has led them to argue in favor of a "rule" to govern the quantity of money supplied that would shift the inelastic money supply independently of changes in the demand function for money. Davidson dubs this kind of supply function as equivalent to a Marshallian "market period". Economists thinking in these terms (e.g., monetarists) are erroneously transferring a market period supply function for money into an analysis in which all the other supplies (i.e., commodities) have flow characteristics.

Marc Lavoie offers a novel perspective about divergent opinions about Kaldor's view on While these views changed between 1958 and 1982 Lavoie maintains that Kaldor was always opposed to the Quantity Theory and neoclassical theorizing about money. This position was consistent with a "certain tradition of the endogeneity of money [that] always existed at Cambridge" though its expression may have been vague until the 1980s - when Kaldor and some of his colleagues, Richard Kahn among them, thought along the same track. However, it is the French economists whom Lavoie credits with providing the most explicit statements of the endogeneity of money, though Paulos Sylos Labini is reported to have noted that an [actual] "economy based on an exogenous stock of money ceased to exist more than two centuries ago!" [p.272].

Kaldorian themes relating to the cyclical nature of aggregate demand and capital accumulation are developed in Part V, entitled "Business Cycles," which is comprised of seven papers. These build on the "stylized fact" that capitalist economies are inherently prone to cyclical fluctuations around relatively high rates of employment. The papers by Peter Skott and Marc Jarsulic are particularly well conceived and executed. They provide something of a transition to Part VI, "The Theory of Growth," which is the area, along with the theory of distribution, to which Kaldor made his greatest contributions. The seven chapters which examine Kaldor's contribution to growth theory are off to a good start with Targetti's paper "Change and Continuity in Kaldor's Thought on Growth and Distribution." By setting out the theory of growth and distribution of the 1950s and 1960s as "Kaldor 1" for the purpose of comparing it with "Kaldor 2," the work of the later 1960s and 1970s, Targetti provides a useful framework for examining both the modifications that Kaldor himself introduced and the ways in which his work relates to the English tradition of Political Economy which, from Smith to Keynes, has been concerned with the dynamics of the economic system rather than with the allocation problem which is the chief focus of the neoclassical tradition.

The paper "Technical Change, Growth and Distribution" by Heinz Kurz adds further dimension to the progression of Kaldor's work. He develops what he terms a "simple macroeconomic model" which has a "markedly Kaleckian flavor" to extend Kaldor's growth and distribution model to accommodate technical changes. Depending on the specifics of the investment function in relation to the savings function the level of utilization and the wage rate, Kurz identifies (as types of growth regimes) overaccumulation, underconsumption, Keynesian, neoclassical and Kaldorian regimes. Technical change is seen as likely to bring about a shift to a different regime because it affects the conditions of production and the savings and investment functions. The really difficult question, Kurz suggests, is whether there is a correspondence between certain theoretical constellations and particular historical economic constellations. The possibilities are the source of the controversy that attaches to the debate about the impact of the microelectronics revolution on the economic performance of the system, particularly as it relates to (un)employment.

The task of extending Kaldor's growth and distribution theory is also undertaken by Harald Hagemann in his paper "A Kaldorian Savings Function in a Two Sector Linear Growth Model." The title speaks for itself as well as for the intellectual complementarity between Kaldor and J. R. Hicks who developed a two sector fixed coefficient model in his Capital and Growth (1965). Harvey Gram extends the Kaldor-Robinson growth model even further in his paper "International Deficits: A Kaldor-Pasinetti Model." He develops an open economy growth model in which international capital flows are shown to be compatible with a rate of growth different from that which is generated by the fixed propensities to save out of profits and wages. Holding constant the wage-profit shares in domestic output, Gram undertakes to show that the distribution of income (inclusive of international interest payments) is a variable in an open economy along with the level of foreign assets (or liabilities). Workers are also capitalists (while capitalists are also consumers) and if a country is a creditor nation whose workers lend to foreign capitalists in the capital market (which is a simple extension of the Pasinetti theorem) trade can become a vehicle for redistributing income among countries.

Part VII, "Empirical Evidence on Post War Growth," which is comprised of only three chapters is, given the problem of data availability, understandably the shortest of the eight parts comprising this anthology. The papers by R. Boyer and P. Petit (Chapter 27) and by S. Nagey (Chapter 29) are not without interest, but it is D. M. Gordon "Kaldor's Macro System: Too Much Cumulation, Too Few Contradictions" (Chapter 28) which this reviewer found most valuable. What Gordon undertakes is to "construct, estimate, simulate and evaluate a reasonably complete macroeconometric model of the post war U.S. economy which builds as faithfully as possible on the internal logic and dynamics of Kaldorian macroeconomics" [p. 519]. The results of the Kaldor model are then contrasted with Gordon's alternative (mostly neo-Marxian) macro model. The latter differs from Kaldor's in its highlighting of potential endogenous barriers to accumulation, in particular the internal contradictions generated by the accumulation process itself. Its recognition of the institutional and power relationships that derive from the existing social structure of accumulation highlight (with Gordon's apologies) "some of the one sidedness of the Kaldorian system" [p. 535]. Proceeding from a Kaldorian macro model modified to reflect capacity utilization (dubbed the "Kalmac" model) Gordon's "Altmac" model incorporates 1) a more classical approach to investment which emphasizes relative profitability as a determinant of accumulation, 2) more complex "social" models of prices, wages and productivity and 3) an approach to labor demand in which relative factor prices play a role. According to Gordon, the Altmac simulation captures the stagnation of the late 1960s and 1970s better than either the Kaldor or the Kalmac models. It was also better able to track the increase in (trended) real productivity growth from 1956.1-1959.2 to 1959.2-1966 and the slowdown after 1966. It also captures the combination of trend and cycles that are represented by annual variations in aggregate capacity utilization more ably than did the Kalmac model. While Gordon offers these findings "oh so provisionally" saying they reaffirm that Kaldorian (i.e., postKeynesian) macroeconomics places too much emphasis on "cumulation" and too little on the endogenous barriers to accumulation, his essay stands virtually alone in this collection in undertaking the huge task of clarifying what exactly are the differences among those who adhere to non-neoclassical points of view. The differences among them are no less substantial than are their differences from those who adhere to the mainstream view and their explication is an essential preliminary to addressing the question of "Confrontation or Convergence?" the subtitle of the Nell-Semmler volume which so enticed this reader.

The concluding Part VIII "Economic Policy and Economic Systems" takes the reader into the realm of international finance, economic policy and comparative economic systems. The first of these by A. G. Hart, "Nicholas Kaldor as an Advocate of Commodity Reserve Currency" [Chapter 30], reexamines the case for an international Commodity Reserve Currency (CRC) as a mechanism for achieving stable prices and markets for primary commodities. As is made abundantly clear in the paper by S. Dell, "Kaldor on International Economic Policy" [Chapter 31], which is substantially a companion to the Hart paper, stable primary commodity prices are viewed as a requisite for an economic environment conducive to full employment world wide. Kaldor's essential point is that the need to ameliorate the difficulties confronting countries whose exports are chiefly primary products, stems from the fact that the gains from technical progress accrue to consumers largely in the form of lower prices, which adversely affects the terms of trade of developing countries. They also subject them to inflationary pressures that are not controllable either by stricter monetary and fiscal measures or more effective taxation of their upper income receivers. What is needed, Kaldor argued, is international regulation of the production and of primary commodities to achieve stable prices for them. Though he ultimately recognized the practical problems inherent in trying to achieve price stability via a commodity reserve currency scheme, he saw it as a possible method for stabilizing not only world commodity markets but also as a means for achieving the highest rate of world expansion by defending against destructive monetarist measures and devaluation.

The concluding paper, "Capitalism, Socialism and Effective Demand" [Chapter 32], by editor Edward Nell, utilizes the distinction between demand constrained and resource constrained systems (concepts attributable chiefly to Kalecki and Kornai though they were effectively utilized by Kaldor). Although the paper is only peripherally Kaldorian in its themes and insights it is, apart from Thirlwall's introductory essay easily the most valuable contribution to this volume and to the literature on comparative economic systems. The fact (noted by Nell) that the paper antedates the fall of the Berlin Wall, in no way diminishes the relevance of the author's precision analysis of the operative characteristics of capitalism and socialism (as "pure" types of systems) and the instruments which each has developed to cope with the inherent problems that derive from the "demand constrained" character of capitalism and the "resource constrained" character of socialism. Many specialists (even in the aftermath of the transition that the formerly planned economies are making towards price directed systems) envision the possibility of "convergence" to a mixed economy, that has the best characteristics of both systems. This is a vision Nell firmly rejects on the ground that a "mixed system could easily end up with the worst of both worlds, but it cannot have the best" [p. 604]. He makes the further point that the systematic scarcity of aggregate demand is the source of the inherent dynamism of the capitalistic market system. In turn, this implies that a dynamic market economy cannot, in principle, allocate scarce resource optimally. Thus Nell concludes that conventional price theory, with its concern about optimal allocation is, paradoxically, more at home in a socialist system than it is in a competitive capitalistic system. The sheer beauty of Nell's writing (which is without a single extraneous paragraph, unclear sentence or misplaced comma) is worth a comment, not only for its own sake, but lamentably, because of its contrast with more than a few of the other contributions. Several would have benefited had the editors restrained their authors from the (perhaps understandable) inclination to retell the whole Kaldor story as a prelude to their chosen themes. Unnecessary repetition, poor syntax and in one case, numerous spelling errors, compromises the effectiveness of a few of the papers. Yet, the editors are to be congratulated for the grand design of an anthology which not only makes the life work of Nicholas Kaldor more readily accessible but, equally important, sets out with exceptional clarity the specifics of the intellectual confrontation between non-neoclassical thinkers and those of the mainstream. It should put to rest, once and for all, the widespread perception that if a theory is "not part of the mainstream, it will either turn out not to be economics or [is] an answer to a question no one needs to ask, or just plain wrong."